UPDATE 1-U.S. nears deal for $1 billion in Egypt debt relief -source

By Matt Spetalnick

WASHINGTON, Sept 3 (Reuters) - The Obama administration is
close to a deal with Egypt's new government for $1 billion in
debt relief, a senior U.S. official said on Monday, as
Washington seeks to help Cairo shore up its ailing economy in
the aftermath of its pro-democracy uprising.

U.S. diplomats and negotiators for Egypt's new Islamist
president Mohamed Mursi - who took office in June after the
country's first free elections - were working to finalize an
agreement, the official said.

Progress on the aid package, which had languished during
Egypt's 18 months of political turmoil, appears to reflect a
cautious easing of U.S. suspicions about Mursi and a desire to
show economic goodwill to help keep the longstanding
U.S.-Egyptian partnership from deteriorating further.

The United States was a close ally of Egypt under ousted
autocratic President Hosni Mubarak and gives $1.3 billion in
military aid a year to Egypt plus other assistance.

Obama ultimately called for Mubarak to step down as he faced
mass protests in early 2011 but the U.S. president was
criticized for taking too long to assert U.S. influence.

Washington, long wary of Islamists, shifted policy last year
to open formal contacts with the Muslim Brotherhood, the group
behind Mursi's win. Mursi formally resigned from the group after
his victory.

Analysts say that one way the United States could influence
the direction of policy in Egypt, a nation at the heart of
Washington's regional policy since a peace treaty was signed
with Israel in 1979, would be through economic support as Cairo
tries to stave off a balance of payments and budget crisis.

Obama first pledged economic help for Cairo last year.
Obstacles remained to completing the debt relief deal - which is
reported to involve a mix of debt payment waivers and
complicated "debt swaps" - and it was not immediately clear when
an agreement might be announced.

But even as the negotiations proceeded in Cairo, Washington
has also signaled its backing for a $4.8 billion loan that Egypt
is seeking from the International Monetary Fund and which it
hopes to secure by the end of the year to bolster its stricken
economy. IMF chief Christine Lagarde visited Cairo last month to
discuss the matter.

Egypt's military-appointed interim government had been
negotiating a $3.2 billion package before it handed power to
Mursi on June 30. Mursi's government then increased the request.

Lagarde said the IMF would look at fiscal, monetary and
structural issues, promising that the IMF would be a partner in
"an Egyptian journey" of economic reform.